From a theoretic economic perspective, the effect of taxes on private saving is ambiguous. If taxes are reduced, the after-tax return on saving is larger; consequently, individuals may be able to maintain a target level of wealth and save less (wealth will grow due to the higher after-tax returns). This is the income effect and has lower taxes leading to less saving. However, the reduced after-tax return changes the relative price of consuming now (saving less) and future consumption (saving more) in favor of future consumption. This is the substitution effect and has lower taxes leading to more saving. The.
